January 2012

… …Monthly Thoughts and Comments


Q4 Earnings – The Big Picture

So far, earnings have not been bad.  We ignore whether companies as a whole beat or miss expectations, as this is wholly based on analysts’ expectations and companies manipulate expectations to a large degree.  Instead, we look for consistent growth and for changes in margins and spending.  With only about 50% of S&P 500 companies having reported as of this writing, here is what we are seeing so far.

Earnings for the 4th quarter 2011 are up year over year by an average of 2.6% (237 companies).   Revenues are up 4.6%.  Operating margins are up 1.8% and net margins down 6.7% on average.

For the year, earnings are up an average of 11.9%, revenues are up 9.3%, operating margins are up 3.8% and net margins are up 2.2%.  Total debt rose 24.6%.

By comparison, in the 3rd quarter of 2011, earnings were up 10.9%, revenues were up 11.9%, operating margins were up 1.8% and net margins were down 1.6%.

The 2nd quarter of 2011 saw earnings up 16.5%, revenues 13.4%, operating margins up 4.3% and net margins were up 3.8%.  Total debt has been growing each quarter.

We need to see how the rest of the S&P reports and will report on it next month, but what we are seeing from the data at this point is that earnings growth is slowing and margins are starting to see some pressure.

This may be important: we have had rising earnings reports for four years now.  Typically, the economic cycle runs about five years, so it would not be surprising to see an economic slowdown.  However, the economy is being manipulated by the Fed’s zero interest rate policy, which may mute the normal economic cycles.  In addition to muting it, the results end up being more violent corrections as the excesses build up much higher than normal (exactly what happened in 2008).

At the same time, results in Europe have actually been better than expected.  McDonald’s, for example, showed the most growth in Europe, of all places.  This is a good reminder that as bad as things look, becoming too pessimistic usually is a bad bet.

Please note that as most of our companies have yet to report as of this writing, we will report on individual companies next month.


Scratching below the surface

We all know that last year was volatile, but is this year any different?

Dec 2011 Jan 2012

Consumer Discretionary:           0.02%          10.2% ++ ­­

Consumer Staples:                   2.25%           0.65% -

Energy:                                   -5.74%          8.14% ++ ­­

Financials:                               1.10%          12.20% ++ ­­

Healthcare:                              0.87%            7.89%  ++ ­­

Industrials:                              0.19%            9.90%  ++ ­­

Information Tech:                   – 2.02%          12.52%  ++­­

Materials:                              - 1.03%          12.99% ­++­

Telecom:                               – 1.44%           0.19% -  ­

Utilities:                                   2.62%          -3.27% -


It looks like it is the good old risk-on/risk-off trade game with the risk-on trade by being the latest move by speculators.


If Chicken Little was an investor today…

Chicken Little is a smart little chick and while she is best known for her report about the sky falling, she was actually the world’s first weather reporter and gave weather reporters everywhere their bad name, even though it wasn’t her fault.   Every day, Chicken (I asked permission to use her first name) would go out doors and walk in a three- block radius (for her this was a large area, being so small) to determine the weather.  Chicken lived up in the mountains so that she could get the information first, because of course she was closer to the sky.  Once she knew the current weather, she would run down to the meadow and report the weather to everyone in town.

This was quite a distance being a little chick and so it would take her half the day to get to town, where she would slide a written report under everyone’s door.  Everyone was so pleased with the ease of receiving the reports, that they no longer bothered to look out the windows, they would just read her report.

The problem, of course, was that by the time she got to town and alerted everybody, the weather had often changed.  You can imagine what happened.  People went out in shorts only to find it was snowing, in heavy coats to find out they should have been wearing shorts, etc., etc.  Well of course, with enough time, two things happened:  first someone got angry and threw a nut at her, leading to the famous alarm, but also, no one ever believed a weatherman again….

In a recent interview, Dennis Gartman, a well-known trader announced he was bullish on stocks and neutral on gold.  Just a few weeks earlier, he had become bullish on gold; a few weeks before that he was bearish and before that he was bullish.  As confusing as this sounds, here are the quotes from the news media covering his predictions.

1)    “The publisher of The Gartman Letter thinks gold is becoming the world’s No. 2 reserve asset, that OPEC will outlast the euro, but that ultimately, nothing is more important than agriculture.”     Hard Asset Investors, June 13, 2011

2)    “Just last week, Gartman told Bloomberg News, ‘we are out of gold’ as of Monday (Dec. 12) and “the beginnings of a real bear market, and the death of a bull.”

Gold, in the 11th year of its longest winning streak in at least nine decades, is poised to enter a bear market, according to Dennis Gartman, who correctly predicted the slump in commodities in 2008.

The metal, which traded at $1,666.30 an ounce at 2:43 p.m. in London, may decline to as low as $1,475, the economist wrote today in his Suffolk, Virginia-based Gartman Letter. He sold the            last of his gold yesterday. Bullion has already dropped 13 percent from the record $1,921.15 reached Sept. 6 and $1,475 would extend that to more than 20 percent, the common definition of a bear market.” Nicholas Larkin, 12/13/11

3)    “During the interview, we discussed Dennis’ recent comments on the gold market.  Dennis called an intermediate top in gold (nearly to the exact day), which inflamed many in the “gold bug” community. Clarifying his position for listeners Dennis said, ‘A lot of people said I had turned bearish of gold–that’s just not true. I had simply turned neutral of gold having been bullish for a long period of time.’”   Bull market Thinking 12/20/11

4)    “It’s a long-term bull market in gold and there are only three positions to have: Really Long, Long, and Neutral.” He’s waiting for a pullback before diving back in.”  Price Signals 1/3/12

5)    CNBC reported on 1/27/12 that Gartman has turned bullish on gold due to the Fed’s recent decision to keep interest rates low through 2014.

I don’t know about you, but I am pretty confused.  If you followed his advice it seems you would be zigging when he is zagging.  And with all of that trading, how much extra money did he make after taxes?  Remember, the tax rules for professional traders are different than the rules for non-professionals.  A profession can take short-term losses and jump right back into same position without penalty.  The losses are all offset by the gains to calculate the tax at the end of the year.  However, non-professionals are exposed to what is known as the Wash Sale Rule.  The Wash Sale Rule says that if a position is sold and then repurchased within 30 days, any loss is not deductible for taxes.  This tax rule has a dramatic impact on returns for non-professionals who actively trade.

The bottom line is that after all the work, all the expenses, and all the time and energy, if you followed Mr. Gartman’s advise, you probably lost money, even if he made some himself.

Another pundit, Jim Cramer, of Mad Money fame, spends his TV time every day giving people advice on what to buy and sell.  I can’t tell whether he is a long-term investor or trader, as it seems to change all the time.

There are numerous people that have done studies on whether Mr. Cramer’s advice as has been profitable or not.  Most of the studies seem to think that he has at least as many losing recommendations as winning ones.

But, the most interesting thing about his show is the disclaimer:

“All opinions expressed by Jim Cramer on the show are solely Cramer’s opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL or their parent company or affiliates, and may have been previously disseminated by Cramer on television, radio, internet or another medium.”

Hmmm, sounds like someone is talking his book and he and some unknown folks are placing bets in advance of the television show.  In fact, is it possible, just maybe, that both of these folks (Mr. Cramer and Mr. Gartman) are talking their books?

“Talking your book” is pushing a strategy or investment that you already have in place with the hope that if others jump in on the same investment or strategy, they will drive the price further in the direction you want, helping you to profit on your own position.

But it is not just these two.  Bill Gross, the well-respected fixed income investor/trader is interviewed frequently and talks his book.  So do most of the portfolio managers who are interviewed on CNBC or Bloomberg.

There is nothing illegal or possibly even immoral about this if the viewers understand what is happening.  The problem, in my humble opinion, is that most viewers do not understand this.

The television shows don’t mind professionals talking their books because the shows make money by getting people to trade – buy and sell things constantly – rather than invest.  Look at the advertisers on the shows; it is all about ways to trade more profitably.

When you listen to anyone about how or what they are investing in, ask yourself, “What is their axe – what is their driver for telling you?”  When did they do what they are telling you to do now, and at what price? What is their timeframe?  Do all of the answers to these questions reflect your own timeframe, risk tolerance and goals?  And then ask one more question: “Are they going to be around to tell you what to do next before they exit themselves?”

Before you take specific advice, you better understand the advice or you are just blindly following someone else.  You know who else does that?  Lemmings.


Alan E. Rosenfield,                                                                                                                               Managing Director

February 2012


Next month:  We will review company specific earnings.

If you have any questions, please contact us at info@harmonyam.com or ARosenfield@HarmonyAm.com


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